Scotiabank analyst sees recovery for office REITs on the horizon

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Office REITs

Scotiabank analyst Mario Saric sees a recovery for office REITs on the horizon for patient investors,

“OUR TAKE: Slight Positive. We’ve seen a (much-anticipated) pick-up in disclosed Office market transaction news, which may have led to an avg. 10 basis ppomts decline in DT [downtown] Office cap rates [profitability ratio, lower is better] per CBRE’s Q4/25 update on January 15th, the most notable decline in 6 years, which follows a DT office vacancy peak in Q4/24. We have AP [Allied Properties REIT, AP.UN-T) and D [Dream Office REIT, D.UN-T) trading at a 6.5-per-cent and 7.5-per-cent implied cap rates ($400/sf and $315/sf; D = 7.1 per cent and $340/sf at DIR trading price) vs. select market transactions in our est. 5.5-8.6-per-cent range (using CoStar gross rent as the base, before adjusting), which suggests to us that AP/D unit prices can move nicely, but require occupancy gains to start materializing (our implied caps reflect 450 basis points for both AP/D), something unlikely with Q4 results (at least for AP; Dream is more timing-specific) per our review of CoStar data for Q4/Q1 to date. Bottom-line, we think CAD Office REIT occupancy-led recovery of significant prior NAVPU erosion (driving 22-per-cent NTM [next 12 months] growth vs. 9-per-cent sector avg.) positions the asset class nicely for 2H/26, but we’re fine with seeing Q4 results (and 2026 guidance) before building positions”.

Citi top picks

Citi updated clients on their North American top picks list of high convictions tock ideas,

“Ongoing AI-related spending tailwinds should continue for that mega cap growth cohort. Second, broadening into other large cap sectors is expected and predicated on ongoing soft landing economic conditions, incremental Fed eases, and a bevy of fiscal stimulus measures … On the crowding analysis, PANW, OKE, ACGL, PWR, EWBC, CELH, AMZN, and DHR are moderate to less crowded compared to the broad US universe of stocks. They may react more positively to upside fundamental catalysts as they can attract a larger set of new investors and have tailwinds to their back. GE, ALLY, WELL, and CCL are the most crowded on the list. Our fundamental analysts provide additional analysis as to why they may still have a favorable risk/reward profile. Equities — This list contains North American analysts’ strongest Buy ideas for the next 12 months. The focus is on bottom-up ideas with analysts competing for inclusion. The list evolves as analysts’ conviction levels change. Performance — The Focus List has delivered an absolute return of 18 per cent (3 per cent relative to the S&P 500) TTM and 12 per cent over a 6-month period (2.5 per cent relative to the S&P 500)”

The 12 companies on the list were all mentioned in the crowding analysis section of the excerpt above.

Play Defence

Morgan Stanley continues to pound the table on U.S. defence stocks,

“In the wake of President Trump’s announced plan to increase the U.S. defence budget to $1.5 trillion (an 50-per-cent increase from the prior budget year), investors have asked about the likelihood and feasibility of this increase. Rather than focus on absolute dollar amounts spent on defence, we looked at defense budgets of several nations on a Purchasing Power Parity (PPP) basis, and we find that U.S. defence spending is falling behind that of China, Russia, and Iran, and the gap is growing. We estimate that if the US increased its defense budget to $1.5-trillion, this would represent 1.3 times the PPP-adjusted spending of Russia, China, and Iran in 2024 – roughly equivalent to 2014 levels. In our view, recognition of this situation could increase support for a $1.5-trilling U.S. defence budget”

Bluesky post of the day

Diversion

“Who is good at soccer?” - Marginal Revolution